Archive for the ‘regulations’ Category

Child Labour in North America

Once upon a time, I was a child labourer in the agricultural sector.

You see, I grew up on a small farm. I learned to drive a tractor when I was 10 years old. I was barely strong enough to push the clutch pedal all the way in. By 12, I was loading bales of hay onto wagons and feeding livestock. Like thousands of other youngsters across North America, I was part of a middle-class farm family.

Of course, my experience — and, I would think, the experience of other farm kids in North America — was worlds apart from the brutality of child labour in developing nations. But there is at least some overlap in terms of ethical issues.

So I’ve been interested to see the debate over proposed changes to US labour laws. The proposed changes “would ban children younger than 16 from using most power-driven equipment and prevent those younger than 18 from working in feed lots, grain bins and stockyards….” The only exception would be children working on farms “wholly owned” by their families.

I don’t have a strong point of view to put forward on this issue. I know I learned a lot as a farm kid, and my parents always made sure I was safe. But growing up on a farm, even a North American farm, isn’t always a positive experience.

All I want to point out here is that there are a couple of importantly-different levels to this controversy.

One level has to do with the conflict between parental autonomy and government regulations designed to protect children. Kids are among society’s most vulnerable members, and some parents are careless, and so government has some obligation to promote their safety and wellbeing. But on the other hand, a society in which parents were not allowed to make important lifestyle decisions for their children — including some risky ones — would be intolerable. (Note: far more children die of drowning each year than die in agricultural mishaps. Never mind automobile accidents.)

But the other level here has to do with regulation and the complexity of human business activities.

You see, the details of the above story, about revising US labor laws, illustrate the difficulty inherent in writing regulations. When US labour laws were originally devised, the meaning of the term “family farm” may have been relatively clear and succinct. So it made sense to say that kids, while generally forbidden from working, could still work on their parents’ “family farm.” But as the story points out, the current proposal “did not consider the thousands of farms nationwide that are owned by closely held corporations or partnerships of family members and other relatives.” In other words, there’s more than one way to structure a business that fits the basic criteria for what we would legitimately call a “family farm,” of the kind that merits a (partial) exemption from child labour laws.

And so this case provides just one more little example of the general principle that regulations aimed at regulating business face the eternal challenge of keeping up with varying and evolving business practices. That means not just headaches for regulators, but also heightened obligations for business to self-regulate.

An Inside Trader’s $92.8m Fine: What’s the Point?

What is it that justifies the record-breaking $92.8m fine slapped on Raj Rajaratnam by the US Securities and Exchange Commission?

I’m not posing this question skeptically. That is, I don’t particularly doubt the fairness of the fine. But it’s still useful to ask what reasons lie behind particular instances of punishment, particularly when those punishments are record-breakers like this one.

It’s worth noting that Rajaratnam is also going to jail, as a result of a separate criminal proceeding related to the same wrongdoing. But let’s focus just on the monetary judgement issued as a result of the SEC’s civil case. There are at least 4 possible justifications for punishment by means of a fine.

1) Deterrence. Sometimes we punish in order to make the offender less likely to re-offend, or to set an example for others who might otherwise have been tempted to commit similar crimes.

2) Restoration. Sometimes a financial penalty can be used to “make whole” the parties harmed by the wrongdoer. This, of course, would require that (some of) the fine actually be given to those who lost out due to Rajaratnam’s hijinks. As far as I know, that’s not going to happen. But then, there’s a sense in which society as a whole loses out when someone violates market norms as aggressively as Rajaratnam did. So maybe American society is the ‘victim,’ here, and is being compensated through its representative, the SEC.

3) Retribution. The fine might just amount to imposing pain on a roughly eye-for-an-eye basis. From this kind of point of view, the goal isn’t to achieve any particular outcomes (like, say, deterring wrongdoing) but rather just to ‘get even’ with the wrongdoer. Retribution is rooted in some pretty primitive (and, frankly, ugly) emotions, but it certainly has its appeal and plenty of defenders.

4) Denunciation. Closely related to retribution, denunciation is essentially the act of saying “No!” in response to crime. From this point of view, a big fine is a way of saying, loud and clear, that the kind of behaviour in which Rajaratnam engaged is simply not OK in our society.

What does the SEC say?

“The penalty imposed today reflects the historic proportions of Raj Rajaratnam’s illegal conduct and its impact on the integrity of our markets,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

OK, that helps. But let’s get it from the horse’s mouth. Let’s look at the words of the judge. According to Judge Jed S Rakoff,

“S.E.C. civil penalties, most especially in a case involving such lucrative misconduct as insider trading, are designed, most importantly, to make such unlawful trading a money-losing proposition not just for this defendant, but for all who would consider it.” He added that it was a warning that, if caught, “you are going to pay severely in monetary terms.”

So there you have it. The rationale behind the historic fine is deterrence. The fine was a warning to others. Of course, the fact that deterrence was the goal doesn’t mean that the fine is actually going to deter anything, or that the outsized fine is going to be more effective in that regard than a more modest fine would have been. Does anyone seriously think that a $92.8m fine is going to work where a $50m fine would not have?

But anyway, the problem here is liable to be the same as that faced in trying to deter street crime, which is that no one expects to get caught. That’s likely to be doubly true of a man like Rajaratnam. After all, he was a Wall Street titan, a self-made billionaire. He was — to steal a phrase from Enron’s Jeff Skilling — the ‘smartest guy in the room.’ How could a man like that even imagine being caught by the mere mortals at the SEC and FBI? The result is that deterrence may well be futile. So what we really need is for our markets and regulatory agencies to be designed with the full expectation that, every once in a while there’s going to be a Raj Rajaratnam. We need institutions to put safeguards in place, precisely to deal with the inevitable lapses in conscience and lapses in our belief in our own fallibility.

Ice Cream, OxyContin, and the 3 Big Questions of Business Ethics

Sometimes it takes a really minor story to illuminate the basic issues at stake in business ethics. Like, for instance, a recent story about a guy selling both ice cream and serious street drugs out of his New York city ice cream truck. Here’s the story, by Jonathan Allen for Reuters: Ice cream vendor gets prison for selling drugs with treats.

That story highlights nicely one of three really fundamental questions that must be asked by anyone seriously interested in business ethics.

The three big questions of business ethics are as follows:

  • 1) What may I do, and what may I not do, in attempting to make a living?
  • 2) In what ways do my obligations change when I act on behalf of others, including employers, shareholders, etc.?
  • 3) What should I do when I see inappropriate business practices that don’t directly affect me?

Each of these “big” questions can of course be subdivided into an entire category of questions. Question 1, for instance, implies a whole range of more specific questions — not just questions about the basic ethics of commerce (Can I lie, cheat or steal? No. Can I exaggerate, or put important details in fine print? Not so clear!) but also questions about Corporate Social Responsibility and corporate philanthropy. The second question covers all the issues that crop up once businesses are staffed by more than a single individual. And the third concerns third-party critique, the work of consumer advocates, and government regulation.

The news story cited above illustrates beautifully Question 1, the question of what you can and cannot do to make a dollar. Louis Scala was, after all, just trying to make a living. There’s nothing wrong with that, of course. The catch was the method he chose.

Scala chose to sell two products. One was soft-serve ice cream, a dessert treat sold primarily to kids, who just can’t get enough of the stuff. The other was OxyContin, a highly-addictive narcotic, sold primarily to adults who just can’t get enough of the stuff. Selling the former is considered a reputable way to make a living. Selling the latter (out of the back of a truck!) is what earned Mr. Scala three and a half years in jail. But then, neither of those products is uncontroversial. Ice cream isn’t exactly healthfood, and child obesity rates are on the rise. But on the other hand, it’s a harmless treat, when consumed in moderation. But on the other hand, it’s not always consumed in moderation. But on the other hand…you get the point.

Figuring out what constitutes a legitimate way to make a living — taking into consideration all reasonable details — is far from straightforward. But realizing that the questions we want to ask about business ethics all fall under one or another of the fundamental headings listed above is, I think, a useful bit of mental bookkeeping, which is increasingly important in a world where criticisms, and defences, of business practices are becoming more and more diverse.

World Standards Day: Celebrate or Mourn?

Today happens to be World Standards Day, a day that honours the work of the thousands of experts involved in setting the huge range of voluntary international standards that regulate production and trade in a globalized economy. Depending on your view of globalization, it’s a day either to be celebrated or mourned.

The standards in question include various standards established by groups like the International Electrotechnical Commission (IEC), the International Organization for Standardization (ISO), and the International Accounting Standards Board (IASB).

I’m currently reading a very good book on just this topic, namely The New Global Rulers: The Privatization of Regulation in the World Economy, by Tim Büthe and Walter Mattli. The book examines the wide and growing range of international, private (i.e., non-governmental) standards being set by groups like the IEC, ISO, and IASB. As Büthe and Mattli point out, such standards are a double-edged sword.

On one hand, they facilitate the international flow of goods and services, making it easier for companies to ship products overseas or set up branch offices in foreign countries without learning entirely new, idiosyncratic local standards. And (being established by international groups of experts) they do this without the direct participation of governments that may not have the financial or technical capacity to set such standards. On the other hand private, international standards don’t bring benefits equally to all: not all companies are equally-well equipped to switch from older national standards to newer international ones, and some countries’ internal regulatory regimes make the switch even harder. And regardless, as Büthe and Mattli point out, adopting new standards always brings costs, including things like the costs of training, the cost of redesigning products, and even paying licensing fees for proprietary technologies.

It seems appropriate, at this juncture — while the Occupy Wall Street movement is a) lamenting the nature of government-industry interaction, and b) deciding whether it is or is not part of the anti-globalization movement — to give some serious and well-informed thought to the desirability of regulatory regimes that are both non-governmental and international.

Conflict of Interest: the SEC Doesn’t Get It

There are a few ways to interpret how the Securities and Exchange Commission handled a blatant conflict of interest on the part of one of its own lawyers, and none of them is particularly flattering.

If you don’t already know the story, see this Wall St. Journal editorial: The SEC’s Ethics: Washington’s double standard on conflicts of interest

…this week’s remarkable report from SEC Inspector General David Kotz disclosing how the SEC’s former top lawyer, David Becker, directly handled matters relating to the Madoff fraud case despite his mother’s $2 million investment with the firm, to which he and his brothers were heirs….

Despite a clear conflict, Mr. Becker didn’t recuse himself. He did (properly) report the conflict to his superior, Mary Schapiro, but she didn’t take the appropriate action in response.

How do we explain this failure? One possibility is that leadership of the Commission is clueless about what conflict of interest is. That seems unlikely; watching for conflict of interest at regulated companies is an important part of the Commission’s mandate.

Alternatively, it could be that this is a case of actual corruption (something not intrinsic to the notion of conflict of interest). That is, it’s possible that Becker was intentionally acting in a genuinely self-serving way, and that Schapiro was facilitating his attempt to do so. But there’s no evidence of that as far as I can see, and making that assumption is neither charitable nor consistent with our best understanding of what motivates wrongdoing. Self-serving rationalizations are much more commonly the mechanism behind wrongdoing than is actual pursuit of personal gain. So I’m willing to assume that Becker and Schapiro genuinely thought there was no real problem, that Becker was technically in a conflict, but that that conflict wouldn’t actually affect his ability to make the right decisions.

More likely, it seems to me, is that Becker and Schapiro, while understanding what conflict of interest is, how it is defined, etc., don’t really get the moral significance of the concept. They don’t see that conflict of interest isn’t about some personal interest actually having an influence on the integrity of the decision-maker. They don’t see that avoiding conflict of interest is about avoiding the shadow of doubt, a shadow that reduces people’s trust in the organization as a whole.

This sort of misunderstanding is alarmingly common in institutions that treat ethics as an administrative function. They focus on the rules, and on the processes and procedures that need to be built in order to enforce the rules. But too often, then forget why the rules are there in the first place.
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Notice / Correction: The first version of this blog entry had a serious, repeat typo, wrongly implying that Mr Kotz, rather than Mr. Becker, was the one in the conflict. I’ve fixed that sloppy error above. My apologies for any confusion.

Pet Sales, Municipal Rules, and Social Responsibility

Toronto’s city council has just told an entire category of retail stores that they must only sell second-hand goods. No, the move isn’t some ‘green’ initiative aimed at encouraging recycling. It’s an animal-welfare edict, a move to force pet stores to sell dogs and cats sourced exclusively from “shelters, rescue groups or people giving up animals for free.” In other words, no more puppy-mill puppies or kitten-mill kittens are to be sold in Toronto.

See the story here, by Carys Mills for the Globe & Mail: Toronto Council bans pet shop sale of dogs, cats, unless they come from shelters.

The motion was passed unanimously, with all councillors bravely taking a pro-puppy stand. And it’s not surprising to see unanimity, even regarding a restriction on commerce, when that restriction can plausibly claim to protect not just helpless animals, but customers (including children) too.

One interesting point about this is the focus — both legal and ethical — on retail. Regulation (in this and many other cases) has, in principle, 3 possible targets: producers, consumers, and retailers. Council has chosen to focus on retailers — rather than, say, pass rules about how dog breeders should operate. Partly that’s a matter of jurisdiction: the municipal government has some authority over how business is conducted within its territory, but no jurisdiction over production processes at puppy mills in far-flung rural locales. But it’s not just a matter of jurisdiction: enforcement can be a lot more efficient when it can focus on just a handful of retail outlets. Retailers are the intermediaries between producers and consumers, and so they’re effectively gatekeepers. That makes them a good target for regulation, but it also means that as crucial links in the flow of ‘product’ (i.e., pets, in this case), they have power — and with power comes responsibility.

The other interesting point here has to do with the public good. The sale of a pet is notoriously likely to result in ‘externalities’ — that is, to have an effect on people not party to the transaction. Poorly-socialized puppies may grow into dangerous dogs. Unwanted dogs and cats may be abandoned, turning into social nuisances, and straining municipal resources such as dog-catchers, bylaw enforcement officers, etc. Unhealthy pets may transmit communicable diseases to other people’s pets. So the policies and practices that a pet store follows affect the interests not just of customers and suppliers, but of society at large. In other words, we see here good examples of that subset of ethical issues that truly are about the social responsibilities that businesses have.

Food Industry Ethics, Regulatory Reform, and Corporate Citizenship

I blogged yesterday about the importance of sound government and rule of law as a background condition for ethical corporate behaviour. Here in Canada (as in most other developed economies) we grumble about our government and our system of regulation, but we’re actually relatively lucky that way, by world standards. Our economy is thriving (quarter-to-quarter hiccups aside) in large part because businesses here have the luxury of doing what they do against a background of generally-stable government and generally-sane regulations.

But that’s not to say that there isn’t room for improvement. One key area in need of (constant?) improvement is food policy. It’s an incredibly complex area, with an enormous range of interests at stake and a huge range of values at play. Public policy is, as a result, pretty messy. For more details, see this new report by the Conference Board of Canada’s Centre for Food in Canada (CFIC). Here’s a summary, from Better Farming: Canada’s food policy system overloaded: report

Out of date policies, laws and regulations as well as conflicting government involvement stymie innovation and economic growth in the country’s food sector says Conference Board of Canada report…

(You can download the report here.)

Economic growth in the food sector isn’t of direct relevance to consumers (though it is of direct relevance to those employed in the sector). But consumers still have plenty of reason to care about food policy. All questions of food policy have a more or less direct impact on the health and/or pocketbooks of consumers; and hence all questions of food policy raise ethical issues (many of which I’ve blogged about). For example, according to the BF story:

The report reviews the Canadian approach to food regulation based on a study of six issues: food additives, genetically modified foods, health benefit claims, country-of-origin labeling, inspection, and international trade. [hyperlinks added]

Industry, of course, has a role to play in helping to reform regulation in this area. But in doing so, industry must think especially carefully about its ethical obligations. Normally, the slogan “Play by the Rules!” sums up the lion’s share of a company’s obligations. But when the issue at hand involves figuring out what the rules — i.e., regulations — should be, industry needs to consider very carefully the full ethical weight of the notion of “corporate citizenship,” and remember that a citizen is someone who participates in policy debates with an eye not just to their own interests, but to the public good as well.

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Thanks to Prof. Richard Leblanc for bringing the CFIC report to my attention.

Highest Standards Aren’t Always Best in Ethics

No one wants low ethical standards, but it’s also a mistake to aim at the highest possible standards — at least it can be, depending on what you mean by “highest.”

See, for example, this useful piece on defence contractors, by Noah Shachtman for Wired: Pentagon Probe Will Review Every Darpa Contract

Since Regina Dugan became the director of Darpa [Defense Advanced Research Projects Agency], the Pentagon’s top research division has signed millions of dollars’ worth of contracts with her family firm, which in turn owes her at least a quarter-million dollars. It’s an arrangement that has raised eyebrows in the research community, and has now drawn the attention of the Defense Department’s internal auditors and investigators…

The story usefully points out that aiming for the highest possible standards of integrity can also cause trouble:

[A former director’s] bright ethical guidelines had unintended consequences. If a company allowed an employee to take a sabbatical to join Darpa, the firm was essentially blocking itself from millions of dollars in agency research projects.

The result, of course, is that under the old rules the agency risked cutting off useful sources of expertise. That’s not to say that the old rules were worse. It’s just to point out that there’s a legitimate trade-off here.

There’s a very general lesson to be drawn from this. When thinking about ethics, the goal isn’t always to be squeaky-clean. The goal is to find standards that are high enough to merit the trust of relevant stakeholders, and to do so without sacrificing other, possibly-equally important, values.

Consider this graphic, which illustrates the challenge of choosing experts to make decisions. On one hand, we want people with real expertise. On the other hand, we want to avoid conflict of interest. That is, we want maximum expertise and minimal risk of bias. So the upper-left quadrant of this graphic is the sweet spot:

conflict of interest: bias and expertise

Note that what we’re looking for here is not the “highest possible” standard of integrity (i.e., the standard that implies the lowest possible risk of bias among decision-makers), but a system that makes the optimal tradeoff between risk of bias, on one hand, and relevant expertise, on the other. The point here is not that we’re trading off ethics and expediency. The point is that we’re trading off competing, ethically-significant values.

The point in thinking about ethics is not to aim at the highest standards, but at the best standards. We do enormous damage both to the functioning of organizations and to people’s willingness to talk openly about ethics when we talk about “high standards” in a way that comes off as unthinkingly pious.

Academic Business Ethics and the Corporation as Political Actor

I’m returning home today after spending the weekend at the Annual Meeting of the Society for Business Ethics, the world’s foremost association for academics engaged in the study and teaching of issues related to business ethics, corporate social responsibility, and so on. (It was a fantastic meeting and anyone with a professional interest in these issues should consider joining SBE.)

One of the dominant themes of this year’s meeting was the role of the corporation in the political realm. It’s an old topic, one revitalized by the US Supreme Court’s decision last year in the Citizens United case. Corporate involvement in the political sphere takes many forms (from lobbying to campaign donations to participation in collaborative approaches to regulation). Such involvement is probably inevitable, but definitely controversial, and so there’s lots to sort out regarding how we should understand corporations in the political realm, and what rights and responsibilities they should have in that world. Among several dozen scholars presenting their research at the SBE meeting, a striking proportion of them presented work related to this set of topics.

David Ronnegard and Craig Smith, for example, presented work that elucidated the connection between competing theories of business ethics, on one hand, and competing theories from political philosophy, on the other.

Anselm Schneider and Andreas Scherer presented their work on the changes in corporate governance necessitated by (what I would call) the quasi-governmental responsibilities that corporations sometimes take on in the international sphere.

Pierre-Yves Néron presented work arguing that the way we think of corporations in the public sphere ought to be strongly influenced by thinking about the kinds of corporate behaviours (including regulatory lobbying, for example) that can either improve or frustrate market efficiency.

Waheed Hussain presented his work on what it might look like to “civilize” the corporation to make its participation in the political realm less worrisome — essentially, by fostering among corporations a “public interest” ethos, and insisting that lobbying etc be framed in terms of the public good.

Wayne Norman encouraged his fellow business ethicists to pay more attention to regulation, rather than focusing (as the typically do) on the corporate ethical obligations that go “beyond mere compliance”.

I myself presented some of my current thinking on the various ways we might think of corporations in their interactions with government. In particular, I argued that while, in some cases, it makes sense to conceptualize the corporation as an agent in its own right, there are other cases (perhaps many more cases) in which it makes sense to think of the corporation as a tool or technology used by citizens to advance their goals. (This is something I’ve touched on before, informally, in a blog entry.)

Although I don’t want to speak for my colleagues, it seems safe to say that the scholars whose work is noted above share an interest in better understanding what it means, and what it should mean, for corporations to be political agents. They are part of a trend — I don’t yet want to say movement — that sees scholars attempting to take seriously the complexity of the practical and philosophical problems raised by having limited-liability, joint-stock corporations participate in a realm that is generally thought of as being rightfully the place of flesh-and-blood citizens.

The Complexity of Executive Compensation

Many jurisdictions have moved recently to give shareholders a “say on pay,” which typically means that companies are required to hold advisory (i.e., non-binding) shareholder votes on compensation. In other words, establishing executive pay remains the responsibility of the Board of Directors, but shareholders are given an opportunity to voice their approval or disapproval.

The Wall Street Journal recently reported that when given their say, shareholders at a resounding 98.5% of American companies have said “yes.” So it seems that, thus far, shareholders are hesitant to challenge Boards in their compensation decision-making.

This is not surprising, given the complexity of the decision that Boards face in setting executive pay. Setting executive pay is a task typically delegated to a Board’s “Compensation Committee.” Now consider the task faced by a Compensation Committee in establishing the total pay-and-incentive package offered to their CEO.

The question facing a Compensation Committee is this: what combination of cash, bonuses, equity, and perks should we put on the table in order to inspire our CEO to perform optimally? In practice, this is a pretty complex question, one not admitting of cookie-cutter solutions. A Comp Committee needs to consider, just for starters:

  • pressures from shareholder (and other stakeholders),
  • pressures from proxy advisory firms and various think-tanks,
  • human psychology, including their particular CEO’s character and motivational levers,
  • the managerial experience and expertise of Committee members,
  • corporate objectives (profit, market share, sales, social responsibility, etc.),
  • their company’s ‘risk appetite’ (roughly speaking, are they trying to incentivize their CEO to be bold, or conservative?),
  • expert opinion about optimal compensation structures (which is deeply divided, to say the least).

The problem here is as much one of epistemology as it is one of ethics. Compensation Committees need to take an enormous amount of information and opinion and distill it into a decision that will work and that will be defensible in the face of enormous scrutiny.

Of course, there is no shortage of compensation consultants, ready and willing to help Compensation Committees with this task. But recent (not-yet-published) research at the Clarkson Centre suggests that many corporate directors are skeptical about the value of compensation consultants.

Given this complexity, it’s not surprising that shareholders — even sophisticated institutional shareholders — are so far pretty hesitant to do much second-guessing. Whether or not that’s a good thing is a separate issue.

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